A weaker currency does not automatically make a trade deficit disappear. The missing piece is often the currency in which trade is actually priced.
In a Conversations with Tyler interview published on September 23, 2026, economist Gita Gopinath returned to a puzzle that looks simple in textbooks and much messier in practice: why don’t exchange rates reliably push trade balances back toward equilibrium?
The conventional story is familiar. If a country runs a deficit, its currency weakens. Imports become more expensive, exports become cheaper, and demand shifts toward domestic production. Gopinath’s argument is not that this mechanism never exists. It is that the mechanism is often weaker, slower, and more asymmetric than the textbook version assumes.
The price you see may not move with the bilateral exchange rate
One reason is demand. A country with strong consumption can keep importing heavily even when relative prices move against it. But Gopinath emphasizes a second mechanism: much international trade is invoiced in a small number of dominant currencies, especially the US dollar.
That matters because contracts are sticky. When an exporter outside the United States sells a product to a US buyer and quotes the contract in dollars, a depreciation of the exporter’s home currency does not necessarily change the dollar price paid by the American importer. The bilateral exchange rate moved, but the import price visible to the buyer may barely move in the short run.
This is the central idea behind the dominant currency paradigm, developed by Gopinath and coauthors. Their empirical work, covering more than 2,500 country pairs and 91% of world trade, found that the dollar exchange rate was more important than bilateral exchange rates for many trade-price and trade-volume responses. The same research found US import volumes to be less sensitive to bilateral exchange-rate movements than standard models would predict.
Why dollar pricing persists
This is not simply a story about choosing dollars as a label. Gopinath stresses that invoicing choices are tied to real production structures. Exporters frequently import intermediate inputs that are themselves priced in dollars. If a significant share of costs is sticky in dollars, firms have a reason to keep their export prices stable in dollars too.
Longer-term contracts reinforce the effect. Prices do eventually adjust, and industries differ substantially, but the near-term response can be very different from the familiar producer-currency model.
Tariffs and exchange rates can therefore behave differently
Gopinath uses tariffs to show the contrast. If a product is already contracted at a sticky dollar price, a tariff is added directly on top of that price. The cost increase can pass through quickly. A change in the exporter’s home currency, by contrast, may not alter the dollar invoice price at all in the same period.
This helps explain why two policies that both appear to change relative prices can produce different short-run outcomes.
What this changes — and what it does not
The strongest version of the claim would be wrong: exchange rates still matter. Gopinath’s own research finds expenditure-switching effects, especially through exports, and the importance of dollar invoicing varies across sectors, imported-input shares, and contract horizons. Over longer periods, firms can reset prices and production can adjust.
The better conclusion is narrower. A bilateral exchange rate is not a complete description of the prices that actually govern trade. To understand trade adjustment, we also need to know the invoicing currency, the structure of supply chains, the timing of contracts, and the relative strength of demand in each country.
That turns a familiar macroeconomic slogan into a more useful question. Instead of asking only, “Did the currency move?”, ask: Which prices actually changed for buyers and sellers?